Kass: Time Frames and Exposures
NEW YORK (Real Money) --
"We are not permitted to choose the frame of our destiny. But what we put into it is ours."
-- Dag Hammarskjöld
Late last week, I mentioned that we are likely to face a lot of volatility in 2013:
Volatility and disorder are likely a more constant state in a global economy that is experiencing a new normal that remains on tenterhooks, still experiencing the deleveraging and tail issues stemming from the last down cycle and, as a result, only experiencing a fragile trajectory of growth.
To me, it's not good volatility; it's the outgrowth of uncertainty regarding economic growth and an unhealthy dependency on the policy of our monetary (Fed) and fiscal (our leaders in Washington, D.C.) authorities.
Regardless of whether volatility is heightened or reduced (or good or bad), among the three most important elements of one's trading and investing should be your time frame, appropriate exposures and risk tolerance/profile.
We all have different quotients of the above factors.
I will deal with two of the three factors this morning: time frames and exposures.
To begin with, I view the market as a continuum in which one's time frame is an essential part of trading and investing.
As a matter of principle, I rarely have a gross exposure (adding my long and short gross exposures together) that exceeds 100%. On average, when I am bullish, I am typically as much as 65% net long (deducting my shorts from my longs as a percentage of the portfolio), and when I am bearish I am typically as much as 45% net short (deducting my longs from my shorts).
In hedge fund circles, these exposure ratios place me in a conservative minority.
Depending on where we are in the market continuum determines the percentage of my portfolio that is committed to longer-term investments (both long and short) vs. shorter-term trading rentals (again, both long and short).
Under a normally trending (and upwardly sloping) market (and dependent upon my degree of confidence), I would have as much as 67% (when fully invested) of my portfolio in investment holdings (with a majority of longs), and I would have as much as 33% of my portfolio in trading rentals (again, a majority of longs).
But let's add two more market scenarios and characters -- namely, a range-bound market and a downwardly sloped market -- to the normally trending and upwardly sloping market getting us to three market scenarios.